Angela Knight: 'Banks can't afford to help borrowers'

Friday 5 December 2008 12:41 BST

Angel Knight: Chief executive, British Bankers' Association

Borrowers have been calling for lower interest rates for some time; now, not surprisingly, savers are starting to shout too. This encapsulates one of the dilemmas of the current situation: what seems right for one group is wrong for another.

In the UK we owe more per person than most of our competitor countries. Yet all the pressure and the fiscal stimulus package is not to persuade us all to cut back, but rather for banks to continue to lend, so that we continue to spend.

In fact, responsible lending to individuals and viable businesses is still taking place, despite perceptions to the contrary. Large numbers of re-mortgages are now being granted each month - more than 50,000 in October.

But the cost of funds to lenders and the rates they charge to borrowers depend on a range of factors, of which base rate is one.

Banks used to be able to keep the price of credit down by packaging up debt and selling it on, through the well-tried and tested securitisation process. This was efficient, effective and - as long as the loans were being repaid - provided a reliable stream of income. But when the securitisation market became infected by exposure to defaulting American sub-prime mortgages, a prime source of providing funding and spreading risk dried up.

The money markets contracted too and as a result, banks have had to adjust to higher costs of funding, and a greater than normal spread between the Bank of England's base rate and Libor, which is a good indication of what really is the rate a bank has to pay.

They have had to make other adjustments as well, to cater for the likelihood of higher arrears and also the need to recapitalise. And, for those receiving an injection of capital from Government, there are further costs and constraints - that capital does not come cheap.

Meanwhile, the mortgage arrears relief package should provide some welcome certainty to those who fear losing their jobs in this downturn. To be quite clear, though, repossession benefits no one and the banks have made commitments to their customers - and to the Government - only to pursue repossession as an absolute last resort.